Wednesday, June 10, 2009

The first test of US Govt letting go… will they???

Banks in the US are currently (and laudably) lining up to repay TARP loans and get out of govt clutches. If you pass the stress test or have plans which will get you over the line then you should be “free to go”. Schools out – or is it?

With the debt and as part of some TARP funding the govt took a bunch of warrants which of course turn to equity under certain conditions. When you repay do you get the warrants back. Silence so far – Treasurer Tim has said it is “an issue”. Yes Dr Phil…. it sure is.

Its a kind of nationalising call option unless the warrants are returned to sender or cancelled. The ability of the US administration to get out of the sector will be tested over this and it should provide a valuable clue. The uncertainty is not good – would shareholders invest in banks with this call hanging around in the wings?